- The Washington Times - Monday, March 14, 2011

The disaster in Japan poses major economic challenges for the Asian giant and is interrupting key trade ties with the U.S. and the rest of the world, but it does not threaten to derail the U.S. and global economic expansions, analysts said.

Large areas of Japan’s northeast coast that were flattened will have to be rebuilt, while a broad swath of the country is experiencing power outages and production stoppages owing to temporary transportation and communication breakdowns.

With about a third of Japan’s electricity generated by nuclear-power plants and 11 of its 54 nuclear plants shut down by the quake, the power shortages and rolling blackouts now plaguing the country could become prolonged, analysts say.

The shock caused a nosebleeding 6.2 percent drop in Japan’s Nikkei 225 stock index Monday, with worries about economic woes reverberating in global markets, contributing to smaller declines of less than 1 percent in U.S. and European stocks.

The prospect of dampened demand for oil from Japan, the world’s second-largest importer, caused a drop in premium crude prices to under $100 a barrel in New York trading early Monday, but prices recovered to close around $101.

The immediate devastation from the quake will shave about 0.2 percentage points from Japan’s economic output this year, Credit Suisse estimates, with the possibility that deteriorating consumer confidence and production cuts in Japan will worsen that drop to as much as 1 percentage point.

Growth had been expected to clock in at about 1.4 percent this year before the quake.

Still, economists are confident the Asian industrial giant will be able to withstand the devastation and, in the long run, even eke out stronger growth as the country mobilizes its vast wealth to take on the estimated $180 billion cost of rebuilding shattered cities and lives.

“The emphasis that Japan and its leaders place on earthquake preparedness is what has so far prevented this very large disaster from morphing into a cataclysm,” said Alex Jurshevski, analyst at Recovery Partners.

“It’s going to take a few days to add up all of the physical damage, human costs and implications for the future,” he said, “but they will be moving forward with reconstruction plans very quickly.”

The part of northeast Japan hit hardest by the quake and ensuing tsunami is not one of Japan’s top industrial areas, but rather is more focused on farming and fishing.

Elsewhere, with about 20 percent of the nation’s power cut off, factories in more industrialized areas that make auto parts, semiconductors, steel and other goods have shut down temporarily, postponing planned deliveries to U.S. importers.

Japan’s auto industry has come to a halt as the physical impact of the disaster has combined with power-conservation measures to hit production,” said Paul Newton, analyst at IHS Global Insight.

“The ripple effect of the stoppages to supply and production in Japan will be felt in many parts of the world, including the United States, China and Europe, as many key parts and technologies are exported to global operations from Japan.”

U.S. airlines and container shipping companies will be hurt by the decline in Japanese economic activity, according to Standard & Poor’s Corp., although the drop in demand for their transportation services could be offset somewhat by lower costs from lower oil prices.

Aside from the mostly temporary interruptions in trade with Japan, however, analysts do not expect the disaster to have a major impact on the U.S. or global economies.

“The expected temporary drop in Japanese demand is unlikely to be sizable enough to have a noticeable impact on U.S.” economic output, said David Greenlaw, economist with Morgan Stanley.

Japan accounts for less than 5 percent of U.S. exports, and that amounts to less than 0.5 percent of total U.S. economic output, he said. But by the same token, when Japan ramps up to rebuild its economy in coming months, the U.S. economy will benefit very little as well, he said.

Some investors are worried about the possibility, however, that the U.S. economy could be hit indirectly because of the critical role that Japan has played for decades helping to finance large U.S. budget and trade deficits.

Mr. Jurshevski said because Japan has giant budget deficits of its own to finance, authorities may decide they need to divest some of their U.S. Treasury securities to finance rebuilding from the quake.

“The Japanese have funding issues. They have to decide how to fund the reconstruction,” he said. With Japan’s budget deficit already at 10 percent of economic output, and an aging population generating shrinking tax receipts, they have “little room to maneuver,” he said.

“That raises the possibility that they could become a seller of Treasuries” at a critical time when the U.S. budget deficit is peaking at more than $1.4 trillion, he said.

The loss of such a major buyer of Treasuries would put substantial pressure on U.S. interest rates and might even force the Federal Reserve to continue its controversial program of purchasing U.S. securities to try to keep interest rates from rising too much, he said.

But Mr. Greenlaw said he sees little potential for spillover effects on U.S. markets. Rather than selling U.S. bonds, Japan is more likely to finance reconstruction through purchases of its own Treasury bonds by the Bank of Japan, he said.

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